Munich, May 12, 2014

Russia has not met the optimistic expectations of automotive manufacturers and suppliers

Vehicle sales are growing more slowly than previously forecast and by 2020 will have reached just 3.3 million vehicles per year

Russia remains an attractive sales market. At the same time, local production is playing a smaller role, and numerous locations are at risk

The import share may grow from about 30% today to over 50% by 2020

The significant risk to sales and production demands immediate action and structural realignment

Russia remains an interesting market for automotive manufacturers, but will probably not be able to meet the industry's optimistic expectations. Quite the contrary: In their latest market analysis entitled "Russia at the crossroads", the automotive experts at Roland Berger Strategy Consultants predict that the number of vehicles sold in Russia per year will rise to just 3.3 million by 2020. This is considerably below the earlier expected figure of 4 million. The shortfall is due not only to the current political crisis, but also to deeper macroeconomic and structural causes. For example: a lack of diversification in the economy, weak economic growth and no stimulus for the market.

"Against this backdrop, we expect the market to decline again this year by around 7%, and only in the next two to three years will it recover back to 2012 levels," says Uwe Kumm, Managing Partner of Roland Berger's Moscow office. "In the short term, the further development of the political situation will be decisive. Over the long term, the market will in all likelihood be able to grow steadily, but much more slowly than previous market studies have predicted." Kumm and his colleagues expect Russian automotive volume sales to increase about 6% annually for the 2014-2016 period, due to a "catch-up" effect, and then dropping to 3.5% annually for 2016-2020. "The market is still attractive, but the previous forecast of over 4 million vehicles sold in 2020 cannot be met, even in an optimistic scenario," says Kumm. He therefore expects a market of 3.3 million vehicles in 2020 – and with the current political and macroeconomic uncertainties, even that figure is questionable.

Share of imports will grow, local production will shrink

Despite this, the experts at Roland Berger emphasize the importance of the Russian automotive market. "Russia is and remains one of the top 10 markets with considerable potential," says Jürgen Reers, Partner in Roland Berger's Automotive Competence Center. "Over the next few years, however, it will fall far short of previous expectations, and as a production location it will be driving with the handbrake on, if not actually in reverse."

According to Roland Berger findings, growth is slowing down and the structure of the market is changing as well. As part of Russia's accession to the WTO, the agreements for supporting local production will expire in 2018. "At that point, the advantages of manufacturing in Russia will disappear," says Reers. Added to that are falling import duties on completely built vehicles and the fundamentally unsound cost structure of Russian production plants. Automotive exports from Russia will continue to play a very minor role, and tensions with Ukraine could cut off a key export market.

"Even assuming that subsidies of local production remain the same, the share of imports into the Russian automotive market will rise from about 30% today to 50% or more," says Reers. Of the vehicle models currently manufactured locally by foreign manufacturers, more than 40% could be imported to Russia in the future. It will no longer be profitable over the long term to produce models with fewer than 25,000 units per year in Russia. "That's why automotive manufacturers and suppliers have to quickly take counteraction and realign their strategies," says Reers.

Negative consequences for the entire Russian automotive industry

"The majority of Russian production plants owned by international automotive manufacturers won't be able to keep up with European locations," warns Juri Wagenleitner, automotive expert at Roland Berger and author of the study. "They are too small, too unproductive and have to transport too much added value over long distances. In light of current overcapacity, they are also competing with variable costs of the core plants that usually produce the same models in larger numbers."

The Roland Berger experts therefore see a clear risk that by 2020, many international manufacturers will significantly scale back their production and local value added in Russia from their original plans. If this happens, the entire Russian automotive industry has to expect cuts. This applies especially to companies that build custom orders, which normally produce models in smaller batch sizes, but also to Russian manufacturers, which depend on a powerful supplier industry. Headcount reduction, lower tax revenue and a negative impact on an already tense economic situation would be the result.

"The Russian government is being called upon to improve economic conditions so that production in Russia will pay off in the future," says study author Wagenleitner. "First and foremost, it needs a clear and long-term strategy for the automotive industry that offers manufacturers and suppliers financial incentives for local production." The Roland Berger experts are of the opinion that Russian manufacturers need to support the government in this regard and coordinate activities with all stakeholders. Until then, each market player would be well-advised to optimize its own situation and minimize risk – especially if the political situation does not improve, or does not improve in good time.